Estate Planning | Lesson 1: Fundamentals of Estate Planning Flashcards
Saul spent four hours with his attorney drafting his will and ensuring that the will accounted for everything. The will was signed, witnessed, and notarized before filing away in the attorney’s safety deposit box. Two years later, Saul reviews the will and determines that he had forgotten to account for grandchildren not yet born when the will was written. Which would be the least expensive way for Saul to add this new language?
a) Write a codicil.
b) Add a generation-skipping transfer clause to his current will.
c) Revoke the last will and write a new will.
d) Issue a disclaimer indicating his intentions.
Answer: A
Saul has the option of writing a codicil to amend the will. This change would be the least expensive and most straightforward way to amend the will. Saul could also revoke the prior will and write a new will, but writing a codicil would undoubtedly be less expensive. Neither a generation-skipping transfer clause nor a disclaimer amends a will.
Carol’s executor has located all of her property. Given the following list, what is the total value of Carol’s probate estate?
(See Image)
a) $24,000.
b) $484,000
c) $834,000.
d) $1,024,000.
Answer: A
Only the automobile, valued at $24,000, would be included in Carol’s probate estate. Because Carol has a named beneficiary, the life insurance and the 401 (k) will transfer per contract law to the listed beneficiaries. The property owned tenancy by the entirety will transfer automatically, per the state law, to Carol’s husband, Jim.
Olivia is married and owns and manages several rental properties. She is concerned that if she became incapacitated, the properties would not be managed appropriately, and her tenants would be upset. Of the following arrangements, which one could fulfill Olivia’s desire to plan for the management of her rental properties in the case of her unanticipated physical or mental incapacity?
a) A durable power of attorney.
b) Owning the property as joint tenancy.
c) Owning the property as tenancy by the entirety.
d) All of the above.
Answer: D
Any methods can be used to plan for asset management in the case of incapacity. A durable power of attorney will allow the power holder to manage the property if Olivia becomes incapacitated. If the property is owned joint tenancy or tenancy by the entirety, the joint tenant could manage the property in the event of Olivia’s incapacity.
After listening to a popular radio financial planning talk show, Paula decided to grant a durable power of attorney to her neighbor, Rita. All of the following statements regarding the durable power of attorney are correct except?
a) To create durable power of attorney, Paula must be at least 18 years old and competent.
b) The power can spring at a certain age or event.
c) After Paula’s death, the power remains in force.
d) If Paula becomes disabled, the power remains in force.
Answer: C
A durable power of attorney does not remain in force after the principal’s death. Still, a durable power of attorney does remain in force after the disability or incapacity of the principal. All of the other statements are true.
Which of the following documents appoints a surrogate decision-maker for health care?
a) Durable power of attorney for health care.
b) General power of appointment.
c) Life insurance beneficiary designation.
d) All of the above.
Answer: A
A durable power of attorney for health care appoints a surrogate decision-maker for health care decisions. A general power of appointment allows the power holder to appoint the principal’s assets to anyone and for whatever reason. It does not give any powers related to health care decisions. A life insurance beneficiary designation only designates the beneficiary of life insurance proceeds.
Which of the following clauses are commonly found in a will?
1. Residuary clause.
2. Secondary clause.
3. Witness attestation clause.
4. Simultaneous death clause.
a) I only.
b) 2 and 3.
c) 1, 3, and 4.
d) 1, 2, 3, and 4.
Answer: C
A secondary clause does not exist, so it is not commonly found in a will. A residuary clause directs the transfer of the balance of assets not already bequeathed. A witness attestation clause declares that the will was signed before witnesses. A simultaneous death clause assumes which person died first if two people die simultaneously.
Which of the following clauses in a will would detail the required amount of time a beneficiary must live following the decedent’s death to receive a bequest?
a) Survivorship clause.
b) Living clause.
c Remaining life clause.
d) Simultaneous death clause.
Answer: A
A survivorship clause provides that the beneficiary must survive the decedent for a specified period to receive the inheritance or bequest. Neither a living clause nor a remaining life clause exists. A simultaneous death clause assumes which person died first if two people die simultaneously.
As part of his military duties, Theo has been called to active duty. Six years ago, in anticipation of being called to service, Theo gave his brother a power of attorney over all of his property that should only be effective when Theo is on active duty. Of the following, what should this power of attorney include?
1. Springing powers.
2. Durable powers.
3. Limited powers.
4. General powers.
a) 4 only.
b) 1 and 2.
c) 3 and 4.
d) 1,2, and 3.
Answer: D
The power Theo gives to his brother should include springing provisions, should be limited, and should be durable. The authority should spring to force only when Theo becomes active in the military. The limited powers would restrict Theo’s brother’s abilities to appoint the property to himself. It would also keep the value of Theo’s assets out of his brother’s gross estate if his brother were to die before him. Including a durability feature in power would keep a power of attorney in force even if Theo becomes incapacitated or disabled. Remember, however, that no power of attorney survives death.
Uli has given his father, Victor, a durable springing power of attorney over his real estate holdings. The power of attorney springs if Uli is ever out of the country. Of the following statements regarding this power, which is not true?
a) If Uli becomes disabled while traveling in Italy, Victor can continue making decisions regarding real estate.
b) If Uli dies while traveling in Taiwan, Victor can continue making decisions regarding the real estate under a power of attorney.
c) Uli can revoke the power at any time.
d) Victor can do anything Uli can concerning the real estate.
Answer: B
No power of attorney survives death. If Uli dies, the executor of Uli’s estate or the court-appointed administrator of Uli’s estate will control the property and act in Uli’s place. All of the other options are correct about a power of attorney.
Match the following characteristics:
__ Survives incapacity
__ Survives death
__ Can be revoked by a competent party
A. Durable power of attorney
B. Nondurable power of attorney
C. Both
D. Neither
A = Survives incapacity
D = Survives death
C = Can be revoked by a competent party
A. Durable power of attorney
B. Nondurable power of attorney
C. Both
D. Neither
A durable power of attorney survives incapacity.
Neither a durable power of attorney nor a nondurable power of attorney survives death.
Both a durable power of attorney and a nondurable power of attorney can be revoked by a competent party.
Twenty-two years ago, James and Kevin began dating, and 19 years ago, they began living together. Last year, James inherited over $9,000,000 from his grandfather. He wants to ensure that if he dies first, Kevin will be taken care of for the rest of his life. Despite your insistence, James does not have a will, and you have advised him previously that state intestacy laws do not protect same-sex partners. Which of the following asset ownership options would fulfill James’s goal of transferring assets to Kevin at his death?
a) Community property.
b) Tenancy in common with each other.
c) Joint tenancy with rights of survivorship.
d) Tenancy by the entirety.
Answer: C
When one owner dies owning property held as a joint tenancy with the right of survivorship, his interest is transferred to the other remaining property owners automatically without passing through probate. In this case, if James and Kevin own property JTWROS, Kevin will inherit James’ interest in the property if James dies first. Kevin and James cannot own property via community property or tenancy by the entirety as they are not a married couple. Tenancy in common does not have an automatic survivorship feature and would not accomplish James’ and Kevin’s goals.
Which of the following types of ownership are only held by married couples?
- JTWROS.
- Tenancy in common.
- Tenancy by the entirety.
- Tenants by marriage.
a) I only.
b) 3 only.
c) 1,2, and 4.
d) 1,2, 3, and 4.
Answer: B
Of the property types listed, only tenancy by the entirety is an ownership form exclusive to married couples. Tenants by marriage is not a form of property ownership.
Christina and Preston have lived in Arizona since their marriage. Christina received an inheritance from her father during their marriage. Christina and Preston are moving to Massachusetts for a new job and have questions regarding their move to a common law (separate property) state from a community property state. Of the following statements, which is true?
a) When a couple moves from a community property state to a common law (separate property) state, the individual property will generally remain personal property.
b) When a couple moves from a common law (separate property) state to a community property state, the individual property will generally become community property.
c) Community property avoids probate at the death of the first spouse and automatically passes to the surviving spouse by operation of law.
d) To get the step-to fair market value on the basis at the death of the first spouse, a couple who lives in a common law (separate property) state can elect to treat their particular property as community property.
Answer: A
Answer A is the only correct statement. When a couple moves from a community property state to a common law (separate property) state, the individual property will generally remain particular property. Answer B is incorrect because the separate property does not typically become community property when a married couple moves from a common law state to a community property state. Answer C is incorrect because community property may be disposed of by will and does not automatically pass to the surviving spouse by operation of law. Finally, answer D is incorrect because couples living in common law states cannot elect community property treatment at the death of the first spouse to get a step-up in the basis.
If George died with the following property interests, which would not be included in his probate estate?
a) Community property.
b) Property held tenants in common.
c) Death proceeds of life insurance payable to her daughter.
d) Property-owned fee simple.
Answer: C
Answer C is correct because the gifted property is generally considered separate property. Answer A is incorrect because the gifted property is usually regarded as individual property unless Izzie elected to treat the property as community property or commingled the assets. In this case, Izzie does not blend the assets, and the problem does not mention that she elected community property status over the assets. Answer B is incorrect because Izzie’s interest in Meredith’s Medical Supplies will not be included in her husband’s gross estate.
Separate property is only included in the gross estate of the particular property owner. Because the interest is not in her husband’s gross estate, it does not receive a step-to-fair market value. Answer D is incorrect because if Izzie dies tomorrow, she must include 100% of the value of all her assets owned as separate property (thus 50% of Meredith’s Medical Supplies).
In 2017, brothers Darryl and Larry agreed to purchase real property and title it joint tenancy with the right of survivorship. At the time of the purchase, Darryl did not have any cash, so Larry paid the $50,000 purchase price himself. Over the next five years, Darryl and Larry allocated the income and expenses of the property equally, and luckily for them, the property’s value increased to $350,000. In 2022, Larry died. How much will his executor include in his federal gross estate as the value of this real property?
a) $50,000. b) $175,000. c) $300,000. d) $350,000.
Answer: D
The contribution rule applies to property owned as a joint tenancy with the right of survivorship. Because Darryl did not contribute any amount towards the original purchase price of the property, Larry’s executor must include the total fair market value of the property in Larry’s gross estate for federal estate tax purposes.
